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Many people turn to auto credit when buying a car. More than 85% of new car purchases and nearly 37% of used car purchases were financed with a loan in the second quarter of 2020, according to the Experian State of the Automotive Finance Market report. Over time, however, buyers might decide that the terms of their auto loan aren’t ideal, leaving them to consider ways to pay off their car sooner than expected.
You can take out a personal loan to pay off your car, but that’s not always a good idea. Learn more about the factors to consider before using a personal loan to pay off your vehicle.
If you are looking for a personal loan, Credible allows you compare personal loan rates from multiple lenders in minutes.
Can you use a personal loan to pay off your car?
You can use the funds from a personal loan for almost any purpose.
Although you are generally not allowed to use a personal loan to finance illegal activities or to do things like play, they are otherwise quite open consumer products. This means you can use a personal loan to pay off your car, in most cases.
If you’re considering using a personal loan to pay off a car loan, it’s important to consider all of the factors involved. Here are some questions to ask:
- What is the interest rate on your new personal loan? Auto loans are secured by your vehicle, so they generally have lower interest rates than unsecured products, such as personal loans.
- Are there any fees? Some lenders charge a fee for issuing (or opening) your new loan. If you don’t save more in interest than you spend in fees, your personal loan could cost you more than your car loan.
- When will you be out of debt? Even though a personal loan has a lower interest rate than your car loan, you might end up paying more interest on that loan if you choose a longer repayment term. Be sure to consider the overall cost of your new loan.
Advantages and disadvantages of using a personal loan to pay off your car
Using a personal loan to pay off your car has both advantages and disadvantages.
Benefits of using a personal loan to pay off your car
- You might be able to get a lower interest rate. If you’re locked into a car loan with a high interest rate, a personal loan can allow you to lower your APR while you finish paying off your car.
- You may be able to lower your monthly loan payments. By getting a lower rate, adjusting your loan term, or both, you may be able to lower your monthly car payments with a personal loan.
- You may be able to remove a co-signer. If you bought your car with a co-signer and now want to remove that person from your loan, taking out a new loan can transfer financial responsibility entirely to you.
Disadvantages of using a personal loan to pay off your car
- Origination fees can make personal loans more expensive. Not all personal lenders charge origination fees. But if yours does, that extra expense may mean your new debt will end up costing you more.
- Interest rates are often higher. Auto loans are secured by the vehicle you purchase, but personal loans are generally unsecured. Because you don’t have to post collateral, interest rates for personal loans are often higher than those for auto loans.
- You might pay more in the long run. When you take out a new personal loan, you can choose your repayment terms. If you choose a longer term than what’s left on your current auto loan, you could end up paying more total interest over the term of the loan than if you paid off your auto loan as scheduled, even if you get a lower interest rate. lower interest.
If you choose to get a personal loan to pay off a vehicle, follow these steps to ensure your new loan is the most financially sound option for your situation.
- Check your credit. Checking your credit report before applying for a new loan helps you know where your credit score is and what kind of loan terms you might be offered. It can also help you identify errors or fraudulent accounts that could affect your loan approval.
- Compare personal lenders. Shopping around for lenders helps you find the best loan rates and terms, and can help you decide which lender offers the loan you need.
- Apply for the loan. Once you’ve found a lender, it’s time to apply for the loan. You will usually be required to provide identifying information and documents, such as your address, phone number or a copy of your ID, and you may also be asked to upload pay stubs or other proof of income. The lender will consider your income, current debt, monthly expenses, and credit history when deciding whether or not to approve you for a loan.
- Repay your car loan. If you are approved, you will pay off your car loan balance with the funds from your personal loan. Ask your auto lender for a repayment quote for the most up-to-date balance information, and be sure to get written confirmation that the loan has been paid. Once the loan is satisfied, your lender will provide you with the title of the vehicle.
With Credible, you can compare personal loan rates in one place without affecting your credit score.
Should you take out a personal loan to pay off your car?
Now you know you can use a personal loan to pay off your car…but should you?
This is an individual decision, but there are certain scenarios where it may make sense to consider paying off an auto loan with a personal loan.
You will save on interest
If paying off your car loan with a personal loan would reduce the total interest paid, it might be worth considering. This may mean reducing your loan’s APR, changing your repayment term, or both.
It’s important to calculate not only your monthly interest, but also your total interest over the term of the loan and any fees associated with your new loan. This way you can determine if your personal loan will actually save you money.
You are under water on your car loan
Owing more to your car than it is worth (called negative equity or being “under water” on the vehicle) is a dangerous situation. If your vehicle were to be stolen or totaled, the insurance would only pay up to its market value – if you owe the bank more than that, you will have to pay the difference immediately.
By repaying your car loan with a personal loan, you protect yourself from the disbursements caused by the unexpected replacement of your vehicle. You will still owe more than your car is worth, but the loan will not be called if the vehicle is stolen or totaled.
You are not eligible for a car loan refinance
More auto loan refinance lenders have maximum loan-to-value (LTV) ratios that they will accept. This means that they will only refinance your car loan if you have a certain amount of capital accumulated in the vehicle.
If your LTV is too high, you may not be approved for refinancing. Instead, a personal loan can help you “refinance” into a lower rate product, but without the LTV requirement.
Credible allows you compare personal loan rates from various lenders in minutes.
If using a personal loan to pay off your car isn’t right for you, here are some other ways to pay off your car loan early.
- Round up your monthly payments. Paying a little extra money for your auto loan each month will help you save money and get out of debt faster. An easy way to do this is to round up your payments if you can.
- Make a payment every two weeks. Making payments every two weeks is another manageable way to pay extra for your loan without feeling so pinched. By the end of the year, you will have made 13 full payments instead of 12.
- Make a large additional payment each year. Whether you get a Christmas bonus or just put some savings aside, making an extra payment each year can get you out of debt much sooner. It will also reduce the total interest paid on your loan.